Weekly game plan 13 September 2020

Being overly bearish is bad for your health, so please take the this week’s game plan with a pinch of salt. There is a chance that we might be ringing alarm bells for now reason, or at least for the wrong reasons, and that the rally will continue for some time still to come. But overall we are becoming more and more concerned with what we think is irrational exuberance in the market. We’ve been giving soft warnings about being overly geared in long positions while the market is at the highs, and at least in the offshore arena that served us well last week. Locally, our market is a different kettle of fish and is far from being as optimistic as the U.S. We saw a very different picture unfold at home with banks and retailers putting in really strong performances. The local market is not our source of concern though as even though there is much to be aware of, we think it is less fragile than the massive tech sector at this stage.

Don’t get us wrong, tech is the future and the way the world is changing and will keep changing is driven by tech. That very long-term fourth industrial revolutionary trend is not going to change for many decades to come, although like all things in markets it will not move in a straight line. The COVID crash is very long topic, but one of the influences it had was to create a massive increase in interest in trading and financial markets. In the U.S., people just sat at home with nothing to do and a nice fat government cheque to inspire their day trading dreams. We’re not here to critique anyone or anything like that, we’re just looking at some data and are getting worried about the short-term consequences of the actions of millions of people.

The chart below shows that in August the S&P500 index rallied 7.2% and that only 10 stocks in the S&P500 index accounted for over 50% of that rally. In other words, the market capitalisation of Apple, Microsoft, Amazon, Facebook, a few more tech companies and good ol Warren Buffett’s Berkshire Hathaway, is so large and their weighting in the idex so heavy that they accounted for over half of all the power driving the index higher during August. This creates some concerns around market breadth, which we spoke of last week.

Below, to further illustrate, is a chart of the FAANGM stocks as a proportion (percentage) of the S&P500 index market capitalisation. We see here that just over a quarter of the entire index is concentrated in just 6 stocks; Facebook, Amazon, Apple, Netflix, Google/Alphabet and Microsoft. Now, all of these companies are actually pretty amazing and this is not the year 2000. These tech companies literally are changing the world in front of our eyes and are making a lot of money doing it. What worries is that perhaps ‘we the people’ have gotten a little over optimistic about how much these companies will continue to grow in the very short-term.

When looking at investment flows into Nasdaq ETFs over the last while, we see something else that is rather concerning. Funds have been flowing out of the normal good ol fashioned boring Nasdaq ETF (QQQ), but has over the last two weeks been piling into the exciting and racey 3x leveraged long Nasdaq ETF (TQQQ). So, investors are pulling out of the cash index tracker and piling into the three times leveraged index tracker… this is rational, right? (Narrator: No, it was not rational.)

It doesn’t end there though. During the last week the SPX Top 100 Call/Put ratio reached around 2.15, meaning there are 2.15 times as much open interest in SPX Top 100 call options than there are put options. Essentially, more than twice as many people are taking short-term (generally around 2 weeks) bets that the market (particularly tech) is going to keep going higher, than what there are people acting on the opposing view. When everyone is looking left…

All that said, In general we’re not entirely bearish either. Coming out of COVID the world is starting to turn back on and this will drive demand of energy and commodities and gambling and all sorts of other industries. Yes things will be different forever, but to a large extent, the things we needed pre-COVID are still the things we need post-COVID. Our thinking currently is that we will very likely see a rotation out of tech and into ‘everything else’, which is likely to increase overall market volatility and put pressure on the very concentrated indices.

S&P500

The S&P500 (as charted here with the SPY ETF) has come down to test the 50 day moving average. Thus far it has not managed to break below the key support, although if does break it could go on to test the 200 day moving average over the coming weeks. A retest of the 200 day moving average would also be a retest of the recent breakout (and secondary trend change). Although that would be a relatively large move, a retest of the 200 day moving average would not negate the current upward primary trend.

Nasdaq

The Nasdaq Index (charted here using the QQQ ETF) looks very similar to the S&P500. In this case though we note that it closed below the 50 day moving average, which opens the door for a move lower. A few key levels to watch would be the previous all time high and the 200 day moving average.

Dollar Index

We’ve mentioned a few times that the fate of the USDZAR is in the hands on the Dollar Index (DXY). So, depending on how much confirmation you want of a trend change, you might have different views here. We’ve been watching the range marked our in grey as a potential signal that the trend is changing, others have been pointing out the purple trend line that was broken and retested in the last week. Either way, it is looking like USD strength is on the cards.

USDZAR

USD strength will spell ZAR weakness. Overall though, the Rand is still in the range, so a move back to the top of the range would not be surprising.

Gold

Gold hasn’t broken out of the formation we pointed out last week. Just a reminder that this is a bilateral long-term pattern, meaning that it can break either way and the formation width is merely used as a tool to target a breakout trade with. The two potential targets here are thus $2160 and $1760 (roughly).

AngloGold

Looking at the NYSE listing of AngloGold (AU), we note that the stock is still very much range bound. For now there is no trade to be had, although this range is offering a clear opportunity to trade a break in either direction.

Richemont

CFR finally broke the range, but most of the targetable move is already done so we’re not happy to chase it from here.

Tiger Brands

The inverse head and shoulders pattern on TBS has still not triggered. Closing the week above the 200 day moving average is worth taking note of though. One to watch in the week ahead.

Old Mutual

OMU tested the breakout and pushed back to the lows for the week. Short trade is looking fairly good.

The Foschini Group

Not a bad move on TFG and encouraging to see it closing above the 200 day moving average. Trade initially featured in the 30 August 2020 weekly game plan. Trailing stop loss for here is recommended.

Woolworths

This one didn’t work out.

Standard Bank

SBK looks fairly solid for a bullish break from the range here.

MTN

Nice break of the trend line, followed by a back test and a solid move firmly below all the moving averages. A close below R57.00 would spell big trouble for MTN.

Nedbank

Make of break here for the NED short.

Requested charts

Sibanye Stillwater

We looked at SSE a few weeks ago and noted a broadening pattern (megaphone). Considering that the current move is a bounce off the bottom of the megaphone, it would seem that there is much more upside to be had before it reaches the top of the formation again.

Momentum wise, we note that momentum is bullish on all counts. Both the MACD and Stochastic have given their full range of buy signals, while relative strength and On Balance Volume hare not really communicating anything of significance.

For traders who are currently long, depending on gearing and trading style, we would recommend either a three day low trailing stop loss or a ATRx2 trailing stop loss. Only once the stock trades and closes below the reg zone (support) would we be convinced the upward thrust is over, although that is a long way down for geared long positions to be able to hold. Should there be a strong ‘risk-off’ theme in the near future, a break above that green zone (resistance) would signal a buy for us.

Nampak

Besides the incredible down trend (weekly chart), what worries us here is that it managed to eek out a close below the previous all time low of 85c. It is a very high risk-reward to buy here for the long-term. But like @VolatilityQ says: “Return always wants its risk payment.”. If you want to get involved here, make sure that it’s with a long-term mindset and that you are not allocating a huge amount of capital into this idea. The close below the 85c level earlier this week could signal further downside. There are also debt problems and just general lower demand for cans (driven by lockdown). Maybe waiting for a rights offer would be a wise way to gain entry into this stock?

Impala Platinum

Generally we are of the view that the global economy coming back online after all the COVID lockdowns will be good for platinum and palladium prices as demand for these two metals will once again outpace supply to meet vehicle and battery manufacturing demands. Thus we are bullish on Platinum Group Metals (PGMs) in general. It follows that our view on platinum miners reflects that view.

Looking at IMP, we note that we have three of four buy signals on the Stochastic as well as two of two buy signals on the MACD. This tells us that from a momentum perspective, the stock is looking strong. A small concern is that the stock has been a relative underperformer for about a year now, although it comes from being the strongest stock on the board last year, so contextually its underperformance this year is understandable.

Without the noise of the indicators, we note a bull flag that has broken higher. Watch out for some resistance around R177.50. A close above that level would likely be a buy signal if you are not already long. A three day low trailing stop or ATRx2 trailing stop would be recommended.

*Please note that these trade ideas form part of a larger weekly plan and the value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. The risk of loss arising from trading in Contracts for Difference can be substantial. You should carefully consider whether such investments are suitable for you in the light of your circumstances and financial resources.

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